Fears of a global credit crunch prompted by contagion from the crisis-hit US housing market led to panic selling and big falls on all the world's stock markets today.

Amid concern that heavily-leveraged corporate deals would collapse in an environment of dearer credit, the FTSE 100 Index lost more than 200 points and the authorities on Wall Street imposed trading curbs to slow the market's decline.

Analysts said markets had been adversely affected by a cocktail of bad news - rising oil prices, evidence that the slump in the American housing market is deepening, speculation that dearer borrowing costs will slow takeovers and signs that the problems from the subprime lending fiasco are spreading through the financial sector.

"This is credit widening fear. You have flight-to-quality buying," said Thomas di Galoma, head of Treasury trading at Jefferies & Co. in New York. "The Street is in a risk reduction mode."

Central banks have been stressing for some time that markets may have been putting too low a premium on riskier assets, but have seen their warnings go unheeded. Analysts said on Thursday, however, that the cost of credit was rising and that was already affecting the financing of corporate deals.

By the close in London, the FTSE 100 Index was down 203.1 points at 6251.2 points, wiping more than 3% off the value of leading shares. It was the FTSE 100's biggest fall for more than five years while the index of 250 leading companies had its worst ever day, plunging 382.5 points to 11033.4.

The German DAX index was down more than 180 points, while the French CAC index was just over 160 points down on the day.

By 7pm UK time (2pm Eastern Daylight Time) the Dow had fallen nearly 300 points to 13490.64, a loss of over 2% on the day.

Shares in companies that had been driven higher on takeover and buy-out hopes were the biggest casualty of a day that saw a fall in share prices begin in Asia and then ripple through Europe and both North and South America.

Banks were left exposed after Chrysler and Alliance Boots failed to find buyers for the $20bn of loans needed to fund their buy-outs, while there were reports that Cadbury-Schweppes was struggling to get the $15bn it is seeking for its US operation.

Investors headed for the traditional safe haven of US Treasury bonds as they lost their appetite for riskier assets, but the dollar was again under pressure on the foreign exchanges, holding its own against a weak pound but struggling against both the Japanese yen and the euro.

US housing market blues

Anxiety over the implications for the wider financial markets from the crisis in the US housing sector re-surfaced as Washington reported that sales of new homes dropped by 6.6% last month and an Australian hedge fund heavily exposed to trades in subprime mortgages announced that it was suspending withdrawals. The fall in sales was the largest in five months and triple the amount analysts had forecast.

"Housing basically seems to be a bust," said Stephen Carl, principal and head of equity trading at the Williams Capital Group LP in New York. "The economic numbers we're seeing are not strong at all. Oil is also not going to help."

The weakness in sales was met by a steady supply of housing onto the market. There were 537,000 new homes for sale in June, holding the same level reported in May.

As the deteriorating mortgage market caused more borrowers to default on their loans, more and more homes are being dumped back onto an already glutted market. Analysts said this over-supply of housing was holding back any chance of recovery in the near future.

Prices, as a result of the turmoil in the market, also softened to $237,900 (£116,184), a fall of 2.2% from a year ago. Adding to pressure on consumers already hard-hit by falling house prices, the cost of US light crude rose above $77 a barrel on the commodities markets on Thursday, its highest level for a year.

Wall Street's optimism in recent months has been underpinned by the feeling that the problems in the housing market have been contained and will not spill over into the wider economy.

That view was being reassessed today after news that non-defence durable goods orders - seen as a good guide to business spending - fell by 0.7% last month, well below expectations of a 0.8% gain.

"The US business sector may not be providing as much of a sturdy offset to the weak housing sector as expected," said Sherry Cooper, chief economist at BMO.

Moody's, a leading ratings agency in the US, echoed this sentiment in their study of the mortgage credit market today. Mark Zandi, Moody's Chief Economist said he expected the downturn in the US housing market, which began two years ago, to continue for at least another year.

The mortgage delinquency rate will peak at a record 3.6% next summer, with some 2.5m first mortgage loans defaulting over the next two years, Moody's predicted.

Mr Zandi added that by the middle of next year, prices will have fallen a hefty 10% from their peak at the end of 2005, with some of the worst affected areas being California, Nevada, Florida and Boston.

Moody's also said one of the most serious threats was to the growth rate of the US economy, which it said would grow 0.7% lower than its 3% potential this year and next.

Mr Zandi said he expected unemployment to tick up as well with one-tenth of the US workforce dependent on the housing market. Florida would be hit even harder, he said, with 20% of its workforce employed in housing-related industries.